Xylem Inc. May 2014 Quarterly Valuation $XYL

Xylem_LogoBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Lowest PEmg Companies for Defensive Investors.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Xylem Inc. (XYL) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Xylem Inc. (Xylem), formerly ITT WCO, Inc., is a provider of equipment and service for water and wastewater applications with a portfolio of products and services addressing the full cycle of water, from collection, distribution and use to the return of water to the environment. It operates in two segments: Water Infrastructure and Applied Water. The Water Infrastructure segment focuses on the transportation, treatment and testing of water, offering a range of products, including water and wastewater pumps, treatment and testing equipment, and controls and systems. The Applied Water segment encompasses the uses of water and focuses on the residential, commercial, industrial and agricultural markets. The segment’s products include pumps, valves, heat exchangers, controls and dispensing equipment. In March 2013, it acquired MultiTrode Pty Ltd.

XYL Chart

XYL data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 2/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years – FAIL
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $38.49
MG Value $45.23
MG Opinion Fairly Valued
Value Based on 3% Growth $23.32
Value Based on 0% Growth $13.67
Market Implied Growth Rate 7.72%
Net Current Asset Value (NCAV) -$3.63
PEmg 23.94
Current Ratio 2.32
PB Ratio 3.17

Balance Sheet – 3/31/2014

Current Assets $1,991,000,000
Current Liabilities $857,000,000
Total Debt $1,199,000,000
Total Assets $4,887,000,000
Intangible Assets $2,199,000,000
Total Liabilities $2,658,000,000
Outstanding Shares 183,800,000

Earnings Per Share

2014 (estimate) $1.92
2013 $1.23
2012 $1.60
2011 $1.51
2010 $1.78
2009 $1.42
2008 $0.00
2007 $0.00
2006 $0.00
2005 $0.00
2004 $0.00

Earnings Per Share – ModernGraham

2014 (estimate) $1.61
2013 $1.47
2012 $1.48
2011 $1.26
2010 $0.97
2009 $0.47

Dividend History

XYL Dividend Chart

XYL Dividend data by YCharts


Xylem qualifies for Enterprising Investors but not for Defensive Investors.  The company does not have a long enough history as a publicly traded enterprise for the Defensive Investor, but it passes all of the requirements of the Enterprising Investor.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and its competitors by exploring the ModernGraham Valuation Index.  From a valuation perspective, the company appears fairly valued after growing its EPSmg (normalized earnings) from $0.97 in 2010 to an estimated $1.61 for 2014.  This level of demonstrated growth supports the market’s implied estimate of 7.72% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls within a margin of safety relative to the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Xylem Inc. (XYL)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Xylem Inc. (XYL) or in any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.

Logo taken from wikipedia; this article is not affiliated with the company in any manner.

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